How to value stock when selling your business

When you’re selling a business, getting the asking price right is a tricky subject. Excluding physical assets, the value of your business is tied up in intangibles such as your brand, staff, customer list and financial performance. Your buyer will also be interested in your future pipeline and recurring revenue streams.

But what about net assets like stock? As part of the process of valuing your business, you’ll come to the stage where you need to consider how much your stock is worth. If you run a services-based organisation like an estate agency or a supply-to-order business such as an interior design company, your stock-holding may be negligible-to-zero. But for a retail business, the value of stock holdings may form a significant part of the total worth of the business – which means it’s important to get it as accurate as possible.

Stock relates not only to finished goods ready for sale – like the jars of sweets in a shop – but also raw materials and work in progress if you manufacture part or all of your product range.

You’ll probably already be making a list of your business’s physical assets, including equipment and plant. Accounting for stock is part of this process but how you crunch the numbers partly depends on the type of business you run.

1. What’s involved?

If you run a stock-driven business – an off licence or corner shop, say – you’ll want to dispose of the stock at a good price or, at the very least, the price you acquired it for. Problems could arise if you and your buyer cannot reach an agreement so it’s advisable to draw up an asset-purchase contract which will include an agreement on what assets are to be sold and how they will be valued. You can always agree to appoint an independent valuer if you fear conflict may arise.

Stock can be valued either on a specific date between exchange of contracts and completion or at completion. Obviously if you set a value before completion, you do have to monitor stock levels right up to the completion date and reflect any variations in the final price.

2. What’s included?

Many small businesses are sold on the basis of a goodwill payment plus stock at valuation (SAV). It’s important to note that the balance sheet SAV may not tally with a specialist valuer’s assessment which will take into account things such as obsolescence, depreciation and shrinkage. Remember, the value of stock doesn’t have an intrinsic value as such – its value exists as a means to produce profit for the owner. Some businesses may be valued instead on a multiple of profits, in which case, stock will simply form part of the company’s net asset value.

3. Getting the value right

Stock is usually valued at whatever is the lowest: cost or net realisable value. In practice, the lowest cost figure is equal to the cost of bringing the product into stock. For a retailer, this figure might cover the cost of acquiring it plus the expense of getting it to the shop.

If the business manufactures a product – like soft furnishings or jewellery, for instance – you’ll need to look at the cost of materials plus labour, expenses and overheads, which is a much more complicated calculation. Net realisable value is a simpler method in this case. It would involve working out how much stock can be sold for, less the outgoings necessary to make a sale.

4. Depreciation

The standard accountancy practice of applying depreciation is commonly used in the case of assets like IT equipment and company cars. If your product range is prone to redundancy – TVs and electronics, for example – it’s probably important to calculate the reduction in value of your stock over a given period.

The easiest way would be to work out the likely value of your stock as a ‘disposal’ asset at the end of its sales-worthy life. This could be absolutely nothing or it may have a residual value for scrap or parts. Whatever this value, you’d deduct this figure from its value on day one (price paid plus costs involved in selling it) and arrive at a total depreciation figure over a period of weeks or months. This figure can then be used to calculate the value of your stock according to how long it’s been held.

5. Make sure you’re on the same page

It could be that your buyer wishes to make significant changes to the business – maybe performing a complete refit or even changing the nature of the business. In this situation the stock is unlikely to form part of the terms of the sale at all and you’ll need to form a separate strategy to dispose of your inventory. The most likely solution is to run down stock levels until the transfer of your business and then look for an independent buyer who may want to acquire the remainder as a job lot.

6. Don’t let stock be a deal breaker

If you’ve owned your business for a number of years, you’ll want to get the best deal you can. It’s easy to get carried away with what you estimate to be the value of stock you’ve worked hard to acquire and set great store by. If you struggle to reach a consensus with your buyer, it’s worth agreeing to an independent valuation. Do be prepared to accept their judgement, though, even if it’s less than you’d hoped. When you take the value of the whole deal into account, you’ll probably find it isn’t worth getting into a deadlock over the price of your stock – certainly don’t let it scupper your chances of a sale.